Falling Dollar Makes America Dirt Cheap

American companies suddenly look cheap to acquisition-minded foreigners, particularly those based in Europe.

Belgian-based InBev's hostile bid for Anheuser-Busch is a recent example. It has bid $46 billion to acquire the company — a 30 percent premium above where Anheuser's shares traded before the June 11 proposal.

A successful acquisition by InBev would put the last remaining mass-market American brewer in foreign hands. InBev is based in Belgium but run by Brazilians.

Anheuser-Busch, which brews both Budweiser and Bud light, holds a 48.5 percent share of U.S. beer sales. It rejected InBev's bid, but the Belgian brewer forged ahead, seeking to unseat Anheuser's 13-member board and take its offer directly to shareholders.

If the takeover goes through, it might open the floodgates to other foreign takeovers of American companies.

Some of the dollar's decline depends on hard-to-measure factors, like the psychology of foreign investors. When the U.S. economy is weakening, many investors stay away. The slide of the dollar has coincided with a long period of relatively low interest rates.

And some of the decline in the dollar's global role "is due to the foreign policy failures of the Bush administration, not just to recent economic developments and policies," suggests Adam S. Posen, deputy director of the Peterson Institute for International Economics and a former economist at the Federal Reserve Bank of New York.

In other words, some international investors unhappy with Bush's policy on Iraq or toward other parts of the world might not wish to invest in American companies or buy U.S. bonds.

Still, he argues that the euro is unlikely to replace the dollar as the world's main reserve currency, and that the euro may be at "a temporary peak of influence." David Wyss, chief economist at Standard & Poor's in New York, says he envisions a day when the dollar and the euro will share billing as the world's reserve currencies.

He predicts that the dollar will remain roughly at its present levels "for a couple years." Still, he says, "We might not be done with this down leg." Another big problem for the dollar is that the European Central Bank is likely to hike rates while the Federal Reserve stands pat, giving euro-based investments a bigger yield advantage.

"I could see more downward pressure on the dollar, over the course of the summer, not dramatically, if the ECB does raise rates," said Robert Dye, an economist with PNC Financial Services Group. "If it is one and done, pressure will be minimal. But if it's an ongoing pattern of rate increases, there will be more substantial pressure."

A euro now buys as much as $1.55 in the United States.

The dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted.

Paul Volcker, who headed the Federal Reserve from 1979-87, warned in April that the nation was in a dollar crisis, and that what is happening now reminds him of the early 1970s, when serious inflation erupted as economic growth stagnated. Then, as now, a weak economy limited the Fed's options.

The result was a spiral of rising prices and wages — until the Fed, led by Volcker, suppressed double-digit inflation with huge interest rate increases that pushed the economy into a steep recession in 1982. He recently criticized the current Fed as defending the economy and the market, instead of defending the dollar. Volcker said that will make defending the greenback much harder later.

Energy consultant Yergin, chairman of Cambridge Energy Research Associates, recently told the House-Senate Joint Economic Committee that oil had become "the new gold."

"Oil has become a storehouse of value — reflecting broad global economic trends and imbalances.

At the same time, oil is increasingly seen as an asset by financial investors, an uncorrelated alternative to equities, bonds, and real estate," he said.

When the credit crisis broke last summer, the result was a sharp reduction in interest rates by the Fed. That, in turn, accelerated the fall of the dollar.

"Instead of the traditional 'flight to the dollar' during a time of instability, there has been a 'flight to commodities' in search of stability during a time of currency instability and a falling dollar," Yergin said.

"There's a painful irony here: The crisis that started in the subprime market in the United States has traveled around the world and, through the medium of a weaker dollar, has come back home to Americans in terms of higher prices at the pump."